Shifting Back the Focus: Fee Shifting Bylaws and a Need to Return to Legislative Intent

Abstract

In ATP, the Delaware Supreme Court upheld as facially valid a bylaw that required owners in a non-stock corporation to pay all legal fees in any action against the entity, its members or owners, unless owners obtained substantially all the relief sought in the complaint. While the Supreme Court has not yet expressly applied the analysis to public companies, the expansive breadth of its reasoning provided boards of “for profit” businesses with an immediate weapon that could be, and has been, used to prevent shareholders and investors from filing actions seeking to expose malfeasance by corporations and their directors. Unsurprisingly, these provisions have proved popular. The response by some has been to ignore the obvious conflict of interest that comes with allowing directors to adopt bylaws that insulate their own behavior from legal challenge and instead characterize any concern as an overstatement. In fact, the ATP decision represents a radical and unjustifiable shift in the nature of corporate law. The Court effectively dismantled a carefully crafted framework put in place by the Delaware legislature. The effect of the decision was to eliminate all meaningful limits in the DGCL on the purpose and content of bylaws adopted by directors and to give boards an effective veto over the filing of actions challenging their behavior. The decision imposed unacceptable financial risk on shareholders (and “prior” shareholders), put in place a frame-work for the creation of other types of bylaws antagonistic to the interests of shareholders, and provided the federal government with an incentive to intervene in the corporate governance process, further eroding Delaware’s historic leadership in the field.